In 2025, the global economy demonstrated a remarkable capacity for adaptation. Despite the continued shocks caused by the Trump Administration’s erratic policies, from tariff threats to intermittent trade wars, markets and developed economies resisted with a strength that surprised many analysts. However, as we head into 2026, there are strong reasons to believe that this resilience may be reaching its limits. Three main factors make up a significantly more complex outlook than the previous year: the limitations of US monetary policy, the accelerated slowdown in China and the multiple challenges facing Europe. The first obstacle comes from the Federal Reserve. Many investors and economists had anticipated an aggressive cycle of interest rate cuts that would provide a cushion against any economic weakening. However, inflation has proven to be much more persistent than expected. Core prices remain stubbornly above the 2% target, fueled by a still-strong labor market and pressures in key sectors such as services and housing. This situation puts the Fed in an uncomfortable position: it cannot significantly relax its monetary policy without risking rekindling the inflationary pressures it took so much effort to control. The room for maneuver has narrowed dramatically, and with it one of the main shock absorbers that supported the economy during the turbulent previous years disappears. The second factor of concern comes from the Asian giant. The Chinese economy is experiencing a sharper-than-anticipated slowdown, with the real estate sector still mired in a structural crisis, domestic consumption weak and exports threatened by the fragmentation of global trade. This slowdown is not a problem isolated to Beijing, since its consequences will spread throughout Asia, a region that critically depends on China as an engine of growth, a destination for exports and a source of investment. From South Korea to Southeast Asia, emerging economies that had opted to integrate into Chinese value chains will likely have to face a painful adjustment in 2026, especially if there is a correction in demand for semiconductors and other related products that Asia has massively exported to the United States, which explains the resilience of this part of the world in 2025 despite Trump’s tariffs. But perhaps no region faces a more challenging start to the year than Europe. The continent is caught in a perfect storm. On the one hand, it suffers a shock of brutal competitiveness from China. Chinese companies have not only caught up with their European rivals in traditional sectors such as automotive and machinery, but they surpass them in green and digital technologies. This challenge is compounded by a 35% appreciation of the euro in real terms against the yuan, making European goods prohibitively expensive in global markets while Chinese imports flood the world. In addition to the Chinese economic challenge, Europe must contend with an increasingly belligerent Russia on its eastern border, which will force substantial increases in defense spending just as public finances are under pressure. And if that were not enough, the Trump Administration has effectively dynamited the transatlantic alliance, leaving Europe geopolitically isolated and economically vulnerable. In short, 2026 begins with a cocktail of unprecedented challenges: limited monetary policy tools for the central bank that issues the world reserve currency, the dollar, the burden of China, and a Europe besieged from all sides. The resilience that characterized 2025 was admirable, but may have exhausted its reserves.Alicia García Herrero is chief economist for Asia Pacific at Natixis and senior researcher at Bruegel.
